Tag Archives: Irlanda

[L]ook at two economies deep in the throes of financial turbulence: Ireland and Portugal. Both have public debt ratios of about 100 percent of GDP. Both have tightened the fiscal stance significantly since the crisis’ onset – Ireland by 7, Portugal by 5 percent, according to IMF data. And yet markets perceive these countries differently.(…)

Why? (…) Because Ireland’s economy has adjusted – and this at a breathtaking pace. Between Q3 2009 and Q4 2010 (…) its unit labor cost in the manufacturing sector fell by almost 5 percent compared to the rest of the euro area, granting the Irish economy a large competitiveness boost. As a result, Ireland’s economy is already growing, driven by exports, and its current account has shifted into surplus. It also seems its banks are now fixed (although this has come with a high price tag). All this has made investors come gradually around to the view that Ireland may be able to grow out of its debt.(…)

Another example: Italy and Spain. Italy’s CDS spread has more than doubled since mid-year, while Spain’s is (roughly) unchanged. Why? For once, Spain has made (modest) progress in improving competitiveness, while Italy has moved in the wrong direction. But arguably more important is that Italy’s government refused very publicly to take any growth enhancing measures, triggering a negative reassessment of Italy’s growth prospects, and therefore its solvency. There is no doubt in my mind that Italy’s risk spread surge is a solvency event, not a liquidity event (otherwise, why hasn’t Spain’s spread surged? Why not Ireland’s?).

In a nutshell: at its core, the euro area crisis is about economies’ ability to adjust within a currency union, or put differently: about the member countries’ capacity to behave in a euro-compatible manner. Economies that do adjust, like Ireland or – to a lesser degree – Spain (or in the early 2000s Germany), stand a fair chance to convince investors that they are good places to put their money. Economies that don’t, however, will struggle to regain or maintain market access – and this independent of how large any rescue pot would be.

Fears that Europe could see a Greek-like debt crisis unfold in Ireland or Portugal escalated Tuesday, with investors selling off bonds and analysts warning that both nations might be heading into critical periods that could trigger bids for bailouts.(…) Concern has been growing for weeks. But on Tuesday, investors punished Ireland in particular after a warning by Standard & Poor’s that it might further downgrade Irish bonds as the cost of that nation’s government bank rescue potentially reaches backbreaking levels. In Portugal, attempts to rein in runaway spending are falling far short of promises, prompting fear that it might need to follow Greece, which late last spring secured a $145 billion sovereign debt bailout from the IMF and the E.U.(…)

Credit rating agency Moody’s says the bond market-implied ratings of both countries fell from Baa3 to Ba1. Ireland’s CDS-implied ratings also dropped a notch, from Ba3 to B1, though Portugal’s held steady at Ba3. For reference, the countries are currently rated Aa2 and A1 by Moody’s, respectively.

Analysts on the political left are using the implosion of the Irish economy to advance their mistaken narrative about the supposed dangers of reductions in public expenditures. This overlooks that any savings generated by spending cuts were more than offset by outlays associated with the €90 billion NAMA to acquire bad loans in the banking system.(…)

Policymakers should not be misled by the Irish crisis. It is debt-financed government expenditures arising from a banking crisis that’s bringing down Ireland, not austerity.